Bank of Scotland guilty of serious misconduct

The Financial Services Authority (FSA) said the division failed to “take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems” before HBOS’s demise in 2008.

The interim report condemned the bank for pursuing “an aggressive growth strategy that focused on high-risk, sub-investment grade lending” which left it highly vulnerable in the economic downturn. But the bank – which along with Royal Bank of Scotland severely damaged Edinburgh’s status as a major financial centre – has escaped a fine in order to protect the taxpayer.

HBOS was taken over by Lloyds as a result of the collapse and the group is now 41 per cent owned by the taxpayer.

It is understood the fine would have easily surpassed the record £17.5 million penalty given to Goldman Sachs for its failures. The publication of the report yesterday raised questions over whether former directors at the bank should face criminal investigations and calls for a public inquiry.

It follows a similarly scathing report into the collapse of RBS which was bailed out to the tune of £45bn and is now 82 per cent owned by the taxpayer.

The FSA specifically did not name individuals but there was implied criticism of senior individuals. This included former corporate division head Peter Cummings – a friend of billionaire Topshop owner Sir Philip Green – who is reported to have left the bank with a £660,000 pay-off and a £6m pension pot.

Former HBOS chief executive Andy Hornby – who received a £2m payoff and now heads the gambling company Gala Coral – has previously also faced serious criticism.

So far, the only individual to be punished for the banking crisis in the UK is former RBS chief executive Fred Goodwin, who was stripped of his knighthood, but other countries including Iceland have sought to bring criminal proceedings against those deemed responsible.

In an uncompromising condemnation of business practices in the corporate division, the FSA said they “contributed to the circumstances that led to the UK government having to inject taxpayer funding into HBOS”.

The FSA added: “The severity of Bank of Scotland’s failings during this time would, under normal circumstances, be likely to warrant a very substantial financial penalty.

“However, because public funds have already been called on to address the consequences of Bank of Scotland’s misconduct, levying a penalty on the enlarged group means the taxpayer would effectively pay twice for the same actions committed by the firm.”

The FSA has committed to produce a definitive public interest report into the causes of failure at HBOS, as it has done with RBS, but said yesterday this was being put on hold while unspecified “other enforcement proceedings” in connection with the bank’s downfall continue.

It is thought these proceedings largely centre on the actions of individuals in the corporate division.

Terry McDermott, the FSA’s acting director of enforcement, said: “The conduct of the [Halifax] Bank of Scotland illustrates how a failure to meet regulatory requirements can end not just in massive costs to a firm, but losses to shareholders, taxpayers and the economy.”

The regulator said that although it was not levying a fine in this case due to the “exceptional circumstances” of the taxpayer bailout it wanted to issue the public censure “to ensure details of the firm’s misconduct can be viewed by all and act as a lesson in risk-management failings”.

In its findings, the FSA said between January 2006 and March 2008 Bank of Scotland’s corporate division “pursued an aggressive growth strategy that focused on high-risk, sub-investment grade lending ... its portfolio was high risk with highly concentrated exposures to property and to significant large borrowers”.

This strategy, the FSA added, was “highly vulnerable to a downturn in the economic cycle, yet the corporate division continued with the strategy even as markets began to worsen in 2007”. In the three years from the start of 2006, its transactions increased in size and complexity and left it with concentrated exposures to property and significant large borrowers.

The value of those deals worth more than £75m nearly doubled from £56bn to £96.2bn between 2006 and 2007, the FSA said. And it pressed ahead with trying to aggressively grow even when markets deteriorated in 2007.

A spokesman for Lloyds said the period under review was before it was taken over by Lloyds TSB. He added: “This will help to draw a line under the events in question and allow the group to move forward.”

The FSA yesterday said it could not give a timeframe as to when the public interest report into HBOS’s failure will be published.

The Treasury and Department for Business, Innovation and Skills, which share responsibility for the banking sector, both declined to comment.